In July 2002 the Sarbanes-Oxley Act was passed by the U.S. Senate by a vote of 98 to 0. The bipartisan support for the legislation emanated directly from the investing public’s lack of tolerance for financial statement fraud. Not surprisingly, when formulating its post-Sarbanes technical audit guidance, the Public Company Accounting Oversight Board (PCAOB) made it clear that detecting fraud must be the focus of the audit process. Consider that in the board’s first internal control standard (Auditing Standard No. 2), fraud was mentioned 76 times. The PCAOB has continued its emphasis on detecting fraud in its revised internal control standard, Auditing Standard No. 5. As their fundamental responsibility, financial statement auditors must determine whether economic transaction activity has been accounted for by the audit client in accordance with Generally Accepted Accounting Principles (GAAP). In this spirit, the cases in this section are designed to illustrate different types of recent GAAP violations.
The case readings have been developed solely as a basis for class discussion. The case readings are not intended to serve as a source of primary data or as an illustration of effective or ineffective auditing.
Reprinted by permission from Jay C. Thibodeau and Deborah Freier. Copyright © Jay C. Thibodeau and Deborah Freier; all rights reserved.
Waste Management: The Matching Principle
In February 1998 Waste Management announced that it was restating the financial statements it had issued for the years 1993 through 1996. In its restatement, Waste Management said that it had materially overstated its reported pretax earnings by $1.43 billion. After the announcement, the company’s stock dropped by more than 33 percent and shareholders lost over $6 billion. The SEC brought charges against the company’s founder, Dean Buntrock, and five other...